The Institutional Infrastructure Supporting the Islamic Finance Industry 23
The IDB bought oil and sold it to importing countries at a modest mark-up.
By the 1980s, the IDB was involved in more diverse trade financing
operations, usingijaraas well asmurabaha, and from the 1990s it has
offered project financing throughistisna’a. This involves the IDB making
payments to contractors, sub-contractors and suppliers to a project, with the
repayments plus a mark-up being made once the project is complete and
yielding returns. Such financing has been used for power generation
schemes, transportation and communications projects and other diverse
infra-structure developments.
Saudi Arabia accounts for over one-quarter of the subscribed capital of
this Jeddah-based institution, Iran being the second largest subscriber with
almost 10 per cent of the capital. The Islamic Republic views the IDB as a
concrete symbol of its cooperation with its Gulf neighbours in helping to
promote Islamicfinance worldwide.
The IDB raises additional finance from Islamic banks through its
specialized funds, such as the Islamic Bank’s Portfolio for Investment and
Development and the Unit Investment Fund, and it has also issued sukuk
Islamic securities to secure further capital. It invests inwaqfreligious
endowments, and has programmes for poverty reduction as well as
scholarships for postgraduate students from poorer Muslim countries
attending recognized universities. Its affiliate, the Islamic Research and
Training Organization, provides organizational back-up and sponsors
numerous Islamic finance conferences. The IDB has evolved into a World
Bank for Muslim countries; indeed, it co-funds with the World Bank and
other development assistance agencies.
The Islamic Financial Services Board
Islamic financial assets and liabilities have different risk characteristics to
their conventional equivalents, which poses a challenge for regulators. The
Islamic Financial Services Board (IFSB)wasestablishedtoadviseregulators
on how Islamic banks and other Shari’a-compliantfinancial institutions
should be managed, and how international regulatory requirements should
be adapted for this distinctive type of banking institution and financial
products. Since its inception in November 2002 in Kuala Lumpur, almost 40
regulators have become members, as well as 108 market players and
institutions such as the Bank for International Settlements, the Interna-
tional Monetary Fund, theWorld Bank and the IDB.
The IFSB has already issued detailed standards, following studies
identifying best practice and widespread consultations with the Islamic
financial services industry and beyond. These standards cover the following:
- Capital adequacy in relation to Basel I and II requirements;
- Risk management, including credit, operational and market risk; and
- Corporate governance.
